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Risk averse demand selection with all-or-nothing orders

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  • Chahar, Kiran
  • Taaffe, Kevin

Abstract

Consider a firm that operates in consecutive single selling seasons, delivering its products across several markets with unique revenue and uncertain demands in each market. Using a profit maximization approach based on a newsvendor-type model, the firm may still incur several losses across consecutive periods in the short run. Risk analysis with demand selection has been modeled where customer/market demands follow a normal distribution. Often a firm faces a set of potential unconfirmed orders, where each order will either come in at a predefined level or it will not come in at all. In this paper, we consider these all-or-nothing (AON) demands and provide insights into their effect on expected profit and the frequency of extremely costly procurement policies. Instead of solely identifying the market/demand set and procurement quantity that maximizes expected profit, we use a conditional value-at-risk approach that allows a decision maker to control the number of profitable but risky demands to consider in the overall procurement policy. This approach is compared against an expected profit objective, and several managerial insights are provided.

Suggested Citation

  • Chahar, Kiran & Taaffe, Kevin, 2009. "Risk averse demand selection with all-or-nothing orders," Omega, Elsevier, vol. 37(5), pages 996-1006, October.
    • Handle: RePEc:eee:jomega:v:37:y:2009:i:5:p:996-1006
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    1. Kevork, Ilias S., 2010. "Estimating the optimal order quantity and the maximum expected profit for single-period inventory decisions," Omega, Elsevier, vol. 38(3-4), pages 218-227, June.
    2. Sawik, Tadeusz, 2014. "Joint supplier selection and scheduling of customer orders under disruption risks: Single vs. dual sourcing," Omega, Elsevier, vol. 43(C), pages 83-95.
    3. Hêris Golpîra, 2017. "Robust bi-level optimization for an opportunistic supply chain network design problem in an uncertain and risky environment," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 27(1), pages 21-41.
    4. Shu, Jia & Li, Zhengyi & Shen, Houcai & Wu, Ting & Zhong, Weijun, 2012. "A logistics network design model with vendor managed inventory," International Journal of Production Economics, Elsevier, vol. 135(2), pages 754-761.
    5. Sawik, Tadeusz, 2011. "Selection of supply portfolio under disruption risks," Omega, Elsevier, vol. 39(2), pages 194-208, April.
    6. Shahrbanoo Rezaei & Iman Ghalehkhondabi & Majid Rafiee & Soudabeh Namdar Zanganeh, 2020. "Supplier selection and order allocation in CLSC configuration with various supply strategies under disruption risk," OPSEARCH, Springer;Operational Research Society of India, vol. 57(3), pages 908-934, September.
    7. Deligiannis, Michalis & Liberopoulos, George, 2023. "Dynamic ordering and buyer selection policies when service affects future demand," Omega, Elsevier, vol. 118(C).
    8. Lin, Jun & Ng, Tsan Sheng, 2011. "Robust multi-market newsvendor models with interval demand data," European Journal of Operational Research, Elsevier, vol. 212(2), pages 361-373, July.
    9. Tadeusz Sawik, 2018. "Selection of a dynamic supply portfolio under delay and disruption risks," International Journal of Production Research, Taylor & Francis Journals, vol. 56(1-2), pages 760-782, January.
    10. Dubey, Vivek Kumar & Chavas, Jean-Paul & Veeramani, Dharmaraj, 2018. "Analytical framework for sustainable supply-chain contract management," International Journal of Production Economics, Elsevier, vol. 200(C), pages 240-261.
    11. Liu, Zugang & Nagurney, Anna, 2011. "Supply chain outsourcing under exchange rate risk and competition," Omega, Elsevier, vol. 39(5), pages 539-549, October.
    12. Mohammad A.M. Abdel-Aal & Mujahid N. Syed & Shokri Z. Selim, 2017. "Multi-product selective newsvendor problem with service level constraints and market selection flexibility," International Journal of Production Research, Taylor & Francis Journals, vol. 55(1), pages 96-117, January.
    13. Sun, Qi & Dong, Yucheng & Xu, Weidong, 2013. "Effects of higher order moments on the newsvendor problem," International Journal of Production Economics, Elsevier, vol. 146(1), pages 167-177.
    14. Wilco van den Heuvel & Semra Ağralı & Z. Caner Taşkın, 2023. "A Decomposition Algorithm for Single and Multiobjective Integrated Market Selection and Production Planning," INFORMS Journal on Computing, INFORMS, vol. 35(6), pages 1439-1453, November.
    15. Strinka, Zohar M.A. & Romeijn, H. Edwin & Wu, Jingchen, 2013. "Exact and heuristic methods for a class of selective newsvendor problems with normally distributed demands," Omega, Elsevier, vol. 41(2), pages 250-258.
    16. Merzifonluoglu, Yasemin, 2017. "Integrated demand and procurement portfolio management with spot market volatility and option contracts," European Journal of Operational Research, Elsevier, vol. 258(1), pages 181-192.
    17. Chun-Hung Chiu & Tsan-Ming Choi, 2016. "Supply chain risk analysis with mean-variance models: a technical review," Annals of Operations Research, Springer, vol. 240(2), pages 489-507, May.

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